The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.

June 10, 2002

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Debtor not entitled to stack nondebtor spouse's Massachusetts homestead exemptions with his own homestead exemption. Bankr. D. Mass. The debtor and his wife purchased a single-family residence in 1980. The debtor and his wife later executed two promissory notes to the creditor in the total amount of $55,000.00. The couple later defaulted on both notes and the creditor filed a state court collection action against the debtor. On August 9, 2000, the debtor recorded a declaration of homestead with respect to the property pursuant to Section 1A of the Massachusetts Homestead Act, attaching the requisite statement from his physician indicating that the debtor was disabled and qualified for disabled person protection under the statute. The creditor proceeded with its action against the debtor and the state court granted the creditor's request for a writ of attachment. The writ was recorded on August 29, 2000. After obtaining a judgment against the debtor on December 11, 2000, the creditor obtained an execution in the amount of $59,697.50 and the execution was recorded on December 20, 2000. Two months later, the debtor's spouse recorded a declaration of homestead on the property under Section 1 of the Massachusetts Homestead Act. On April 2, 2001, the debtor filed for chapter 7 relief, listing an interest in the homestead property that he valued at $560,000.00. On his exemptions, the debtor claimed the protection of both his Section 1A exemption and his wife's Section 1 exemption. The sum of both exemptions was $600,000.00. The debtor listed two secured mortgages on the property totaling $194,857.91. The debtor then filed a section 522(f) motion to avoid the creditor's judicial lien, alleging that the lien impaired the debtor's Massachusetts' property exemptions. The creditor objected to the debtor's motion and to his claimed exemptions, arguing that the debtor was not entitled to assert the homestead exemption of his nondebtor spouse. After reviewing additional sections of the Massachusetts Homestead Act, the bankruptcy court concluded that the nondebtor spouse's subsequent declaration of homestead under Section 1 defeated the debtor's homestead declaration under Section 1A. However, although the debtor was not entitled to stack both his and his spouse's homestead declarations, the debtor was entitled to claim the benefit of his spouse's subsequent declaration, which was in the amount of $300,000.00. The bankruptcy court then determined that the sum of the creditor's judicial lien, along with the two mortgages and the debtor's exemption, totaled $557,597.70. Since the value of the liens and the debtor's homestead exemption did not exceed the value of the property, the bankruptcy court ruled that there was no impairment of the creditor's judicial lien. The court then sustained the creditor's objection and denied the debtor's lien avoidance motion. In re Garran, 2002 Bankr. LEXIS 281, 274 B.R. 570 (Bankr. D. Mass. March 15, 2002) (Feeney, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11[2]

Bankruptcy court's vacation of automatic stay was affirmed on appeal. S.D.N.Y. The chapter 13 debtor appealed the bankruptcy court's order granting his landlord's motion for relief from the automatic stay. The debtor was merely the roommate of the former legal tenant of the apartment in which he resided, and not the legal tenant. After the debtor failed to pay postpetition rent to the landlord, the landlord moved to vacate the stay so that it could enforce a warrant of eviction previously issued by the state (New York) court. The bankruptcy court granted the motion to vacate the automatic stay and ordered the debtor to comply with the state court's eviction order. The district court affirmed, holding that the bankruptcy court correctly granted the landlord's motion to vacate the automatic stay. The debtor was never in privity with the landlord and consequently had no property interest in the apartment capable of being protected by the automatic stay. Griggs v. 25 Realty Assocs., L.L.C., 2002 U.S. Dist. LEXIS 5977, - B.R. - (S.D.N.Y. April 4, 2002) (Buchwald, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03

Rents generated by real property owned by debtor did not constitute cash collateral. Bankr. W.D. Pa. The chapter 11 debtor moved for an order authorizing its postpetition use of rents generated by real property that it owned. The debtor had granted to the creditor a mortgage on its realty, which contained an assignment of rents clause that was triggered upon the debtor's default under the mortgage. The creditor enforced the assignment of rents clause and the debtor executed an additional assignment of rent document prepetition. The debtor maintained that the rents constituted cash collateral of the creditor under section 363(a), and that it could use such rents as a means to fund a reorganization plan pursuant to section 363(c)(2)(B). The creditor objected to the motion, claiming that because the debtor did not possess an ownership interest in the rents as of the commencement of its case, the rents constituted neither property of the estate nor cash collateral within the meaning of section 363(a). The bankruptcy court denied the debtor's motion, holding that because the rents did not constitute either property of the estate or cash collateral within the meaning of section 363(a), they could not be used by the debtor postpetition pursuant to section 363(c)(2)(B) or otherwise unless the creditor consented to such use. Under state (Pennsylvania) law, the creditor obtained ownership of the rents prepetition. The court rejected the debtor's position because the property could not be deemed 'cash collateral' unless the estate had an interest in such property. Robin Assocs. v. Metro. Bank & Trust Co. (In re Robin Assocs.), 2001 Bankr. LEXIS 1853, 275 B.R. 218 (Bankr. W.D. Pa. November 1, 2001) (McCullough, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.03[3]

Bank did not violate discharge injunction by selling discharged debt to collection agency.E.D. Va. The chapter 7 debtor appealed the bankruptcy court's order granting the bank's motion to dismiss a complaint brought by the debtor. The debtor listed an unsecured credit card debt owed to the bank's predecessor on his schedules and received a discharge. The bank sold the discharged account to a collection agency, which attempted to collect the debt from the debtor. The debtor filed a complaint against the bank, alleging that it violated the discharge injunction. The bankruptcy court held that the complaint failed to state a claim upon which relief could be granted and granted the bank's motion to dismiss. The debtor argued on appeal that the bank's sale of the discharged account to a collection agency amounted to an improper attempt to collect the discharged debt. The district court affirmed, holding that the bankruptcy court did not err as a matter of law by holding that the debtor's complaint failed to state a claim upon which relief could be granted. The discharge injunction applied only to actions taken by a creditor to collect from the debtor. There was no prohibition on the creditor selling the discharged debt, presumably at a greatly discounted rate, to a third party. Absent an agency relationship between the bank and the purchaser of the debt, the bank was not liable for the purchaser's subsequent attempt to collect on that debt. Finnie v. First Union Nat'l Bank, 2002 U.S. Dist. LEXIS 5912, 275 B.R. 743 (E.D. Va. April 3, 2002) (Smith, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2]

Real estate broker's claim for nondischargeable judgment was denied. Bankr. N.D. Tex. The chapter 7 debtor's real estate broker filed an adversary proceeding seeking to have a judgment debt deemed nondischargeable. The broker and the debtor had entered into a one-year exclusive listing agreement for the broker to sell property belonging to the debtor. The contract provided the owner would pay the realtor a commission in the event the property was sold during the term of the agreement. At the end of the agreement's term, the debtor authorized the broker to continue to represent him for four more months. During the extension period, the debtor executed a contract of sale and leaseback provision with the purchaser and closed on the sale one day after the extension terminated. The broker obtained a judgment in state (Texas) court for the commission due pursuant to the contract. The debtor testified he thought the leaseback provision in the sale contract was, in effect, a form of seller financing that released his obligation under the listing agreement. The bankruptcy court granted judgment in favor of the debtor, holding that the debtor's breach of the listing contract did not constitute a nondischargeable obligation under section 523(a)(6). The debtor's breach was not committed with an objective substantial certainty of harm to the broker or with the subjective motive to cause the broker harm. Thus, the debtor had not intentionally caused injury, and the broker's complaint was denied. Cotten v. Deasy (In re Deasy), 2002 Bankr. LEXIS 308, 275 B.R. 490 (Bankr. N.D. Tex. January 30, 2002) (McGuire, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

Marital distribution award to debtor's former husband was nondischargeable. Bankr. N.D. Ohio The debtor's former husband filed an adversary proceeding seeking a determination that a marital debt owed to him by the debtor was nondischargeable. Pursuant to the parties' divorce decree, the debtor was required to pay her former spouse $10,000, as a distributive award, to equalize the difference in values they each maintained in their respective pension accounts. The debtor maintained custody of the parties' child and received monthly support payments from her former husband. Both the debtor and her former spouse were able to afford all the basic necessities of life, but neither maintained an extravagant lifestyle. After considering the debtor's reasonable monthly expenses, she had approximately $500 per month in disposable income. The bankruptcy court entered judgment in favor of the former spouse, holding that the debtor failed to establish her requisite burden under either section 523(a)(15)(A) or section 523(a)(15)(B). The debtor had the ability to pay the obligation in full within two years. Because the benefits and detriment that would befall the parties if the court were to discharge the obligation were equal, the debtor failed to establish that the benefit to her outweighed the detrimental to her former spouse. Smith v. Shurelds (In re Shurelds), 2001 Bankr. LEXIS 1893, 276 B.R. 803 (Bankr. N.D. Ohio November 2, 2001) (Speer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21

Retainer agreement providing for monthly installments to pay chapter 7 attorneys' fees did not violate automatic stay or discharge injunction. Bankr. N.D. Ill. The debtors filed several adversary proceedings on behalf of themselves and all similarly-situated chapter 7 debtors, alleging that their chapter 7 attorneys had violated the automatic stay and the discharge injunction by collecting attorneys' fees related to the chapter 7 cases after the cases were filed. In each of the cases, the debtors retained a law firm to prepare and file a chapter 7 petition. Before the petition was filed, each of the debtors signed a standard form retainer agreement requiring them to pay the law firm's initial fees in monthly installments. In accordance with the terms of the retainer agreements, the law firms being sued deducted monthly payments from the debtors' bank accounts for the legal services they performed preceding the orders for relief. The deductions were made while the chapter 7 cases were pending and after the debtors received their discharge. The debtors did not allege that the fees were unreasonable or that the law firms did not earn the money. Rejecting the majority view, the bankruptcy court ruled that the law firms had not violated the automatic stay or the discharge injunction, and that they had not committed professional malpractice. After reviewing the rules of statutory construction, the bankruptcy court found that to follow the plain meaning of sections 362(a), 523(a)(2) and 727(a) would result in section 329 and Rule 2017(b) being nugatory. Further, the court found that a literal application of the automatic stay and the discharge injunction would contravene the intent of the framers of the Code because it would conflict with important federal interests, including the interest in equal access to the courts and the efficient operation of the bankruptcy system. Finally, the court noted that debt incurred to the debtor's bankruptcy counsel would not add to the debtor's financial distress; rather, it was a means by which the debtor may obtain relief from that distress. Accordingly, the court granted the law firm's motion to dismiss all counts of the debtors' complaint for failure to state claims upon which relief could be granted. Bethea v. Robert J. Adams & Assocs. (In re Bethea), 2002 Bankr. LEXIS 285, 275 B.R. 284 (Bankr. N.D. Ill. March 29, 2002) (Barliant, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.04

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Plan that paid less than 10 percent dividend on debt incurred by fraud was properly confirmed. 7th Cir. The creditor appealed the decision of the district court affirming the bankruptcy court's confirmation of the debtor's chapter 13 plan. The creditor had obtained a state (Kentucky) judgment against the debtor, which was deemed nondischargeable in the debtor's chapter 7 case. The debtor subsequently filed a chapter 13 petition, listing the objecting creditor as his only remaining creditor and proposing to pay her less than 10 percent of what was owed on the obligation. The creditor contended that the plan was not proposed in good faith, citing the debtor's prepetition conduct and the low amount of the payout relative to the overall debt. The creditor also alleged that the debtor was padding his expenses and understating his income. The bankruptcy court modified the plan to increase the payments to the creditor and concluded that the plan was proposed in good faith, and the district court affirmed. The Court of Appeals for the Seventh Circuit affirmed, holding that the bankruptcy court's conclusion that the debtor's plan was proposed in good faith was not clearly erroneous. The bankruptcy court properly considered the debtor's prepetition conduct, the nature of the underlying debt, and whether the debtor had committed all of his disposable income to the plan. The court noted that the Code required that the plan be proposed in good faith, not that the debt be incurred in good faith (citing Collier on Bankruptcy, 15th Ed. Revised). In re Smith, 2002 U.S. App. LEXIS 6683, 286 F.3d 461 (7th Cir. April 11, 2002) (Ripple, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.04

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Dismissal of debtor's case for failure to appear at examination was upheld on appeal. B.A.P. 8th Cir. The chapter 7 debtor appealed the bankruptcy court's dismissal of his case for failure to appear at the meeting of creditors. A notice of the time and place of the meeting of creditors was mailed to the debtor at the address listed on his petition. After the debtor failed to appear, the bankruptcy court issued an order to show cause why his case should not be dismissed. The debtor's sister wrote a letter to the court and requested a continuance of the show cause hearing, alleging that the debtor was in prison and would be released two weeks after the hearing date. After the court continued the show cause hearing to a later date, the debtor mailed a request for an additional 90-day continuance because he was allegedly still incarcerated. The bankruptcy court denied the debtor's request and, when the debtor failed to appear at the show cause hearing, dismissed his case. The B.A.P. affirmed, holding that the bankruptcy court's dismissal of the debtor's case for failure to appear at the meeting of creditors was not an abuse of discretion. The debtor filed his petition knowing he was in no position to appear personally at such a meeting and did nothing in advance of the meeting of creditors to make arrangements for his appearance or for a continuance of the examination. Davis v. Case (In re Davis), 2002 Bankr. LEXIS 335, 275 B.R. 864 (B.A.P. 8th Cir. April 15, 2002) (Kressel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:343

Panel reversed bankruptcy court's finding that debtor's unsecured liquidated debts exceeded limit of section 109(e). B.A.P. 9th Cir. The debtor filed for chapter 13 relief and listed unsecured debt in the amount of $175,580.50. The creditor objected to confirmation of the debtor's chapter 13 plan and moved for dismissal of her case, alleging that she was ineligible to be a chapter 13 debtor because her unsecured debts exceeded the dollar limits applicable under section 109(e). At the time, these limits were $269,250.00 for unsecured debt and $807,750.00 for secured debt. The creditor based its argument on the premise that the debtor was potentially liable in two state court lawsuits, the value of which was greater than $93,669.50 (which was the difference between the statutory limit and the amount of unsecured debt already declared by the debtor). After reviewing the pleadings from the two state court cases, the bankruptcy court fixed the liquidated debt in the first case at $50,000.00, based on the demand for damages, which was 'in excess of $50,000.' The court then fixed the liquidated debt in the second case at $640,792.50, based upon the open book account at issue in the case. Applying these numbers, the bankruptcy court determined that the debtor's unsecured debts exceeded the statutory limit for a chapter 13 debtor. The court further found that she had acted in bad faith by filing her petition shortly before a state court established trial dates in the two state court cases. After the bankruptcy court dismissed the debtor's chapter 13 case and barred her from filing another case for 180 days, the debtor appealed. The B.A.P. for the Ninth Circuit reversed the bankruptcy court's decision, ruling that the bankruptcy court had erroneously concluded that the debtor owed any liquidated debt in the second lawsuit. The panel found that the second lawsuit's complaint contained no allegations against the debtor personally. The panel also noted that the debtor was not a named defendant in the second lawsuit. Further, because the open book account dispute made the claim difficult to ascertain and prevented the ready determination of the amount, if any, owed by the debtor to the creditor, the panel determined that the second lawsuit debt was unliquidated and did not count toward the debtor's section 109(e) limits. Ho v. Dowell (In re Ho), 2002 Bankr. LEXIS 277, 274 B.R. 867 (B.A.P. 9th Cir. March 13, 2002) (Perris, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[2]

Debtor's debts exceeded statutory limits on unsecured, noncontingent, liquidated debts. Bankr. D. Colo. After the debtor filed for chapter 13 relief, the creditor, who was the debtor's sister, filed an objection to confirmation of the debtor's plan, arguing that the debtor exceeded the statutory limits on noncontingent, liquidated, unsecured debt set forth in section 109(e). The creditor based her argument on her proof of claim, which was valued by the creditor at $270,527.43 and which, by itself, exceeded the statute's limits. The debtor disputed the claim, which she had listed as having a $0.00 value, arguing that it was 'contingent' and 'unliquidated.' After reviewing the facts, the bankruptcy court determined that the creditor's proof of claim was filed as the representative of a probate estate and was based upon allegations that the debtor, while acting as a conservator for the testator, misappropriated funds that she was to manage for the testator. The bankruptcy court further found that a probate court Special Master had investigated the expenditures and found them to be inappropriate. The bankruptcy court further found that the probate court had issued an order requiring that the debtor show that the funds and expenditures at issue were properly authorized and accounted for in the debtor's capacity as fiduciary. However, before the scheduled probate court hearing could take place, the debtor filed her chapter 13 petition. Because the amount of the creditor's claim could readily be determined based on the extensive findings by the probate court Special Master, the court ordered the debtor's chapter 13 case dismissed because the debtor exceeded the statutory limits on debt. In re Reader, 2002 Bankr. LEXIS 266, 274 B.R. 893 (Bankr. D. Colo. March 26, 2002) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[2]